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INSURANCE REGULATION IN JAMAICA: A CASE STUDY OF THE JAMAICAN EXPERIENCE Presented at the Caribbean Actuaries Association Conference by Leon Anderson Senior Director, Insurance The Financial Services Commission JAMAICA December 8, 2006
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Introduction
During the mid 1990’s (circa 1996 – 1999), Jamaica’s financial sector experienced a period of instability in which the Government of Jamaica had to intervene to assist several financial institutions, some of them “large” (five were life insurance companies, one was a general insurance company while eleven were commercial banks and merchant banks) from a severe liquidity and solvency crisis. During 1996, a group of chief executive officers of life insurance companies approached the government for help with what they described as liquidity problems. Preliminary analysis showed that what was positioned as a liquidity problem based on a mismatch of the maturities of assets and liabilities, was in fact a problem of insolvency of varying degrees. Even more significantly, it became clear that the difficulties were not confined to the insurance sector but the banking sector was also affected. Insurance companies in conglomerates, given their connection under the group umbrella, were severely affected through inter-company lending, as they advanced funds to other group companies which were short of cash. Diagnostic reviews of troubled institutions in 1997 unearthed several factors contributing to the sector's turmoil,
viz
:
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Absence of or failure to comply with proper internal control procedures.
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The troubled banks showed a high incidence of fraud and irregularities indicating weaker controls.
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Poor risk management and inadequate portfolio diversification.
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Poor regulatory and supervisory framework was present in Jamaica.
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The combined threat was a loss of approximately $341 billion (US$10 billion) (sum assured) affecting almost 500,000 policyholders in the insurance sector while over two million depositors were at risk. It was decided that the risk to the economy of the collapse of the banking and insurance sector was unacceptable. The bailout of financial institutions cost approximately 40 percent of GDP, which suggested that Jamaica’s financial sector crisis was one of the costliest, in terms of its fiscal burden (see figure 1). The Jamaican crisis was resolved relatively quickly
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but was accompanied by an increase in the stock of public sector debt. The debt burden is widely viewed as a major constraint on the provision of public goods and services while at the same time crowding out private investment and slowing the rate of economic growth.
New Regulatory Regime
The crisis, however, also led to an improvement in regulation and supervision of the financial sector. The Financial Services Commission (FSC) was created through the Financial Services Commission Act to oversee the regulation of Jamaica’s insurance, pension and securities industries. The FSC, a self-financing regulatory body, was given wide ranging powers to supervise, investigate and sanction entities falling under its jurisdiction. Bearing in mind the factors behind the crisis, the FSC’s supervisory practices initially placed a significant amount of weight on prudential supervision; focusing on the quality of internal controls, risk management and corporate governance within regulated institutions,
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See The World Bank “Jamaica: The Road to Sustained Growth” Country Economic Memorandum, December 2003.
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separate and apart from the expected focus on the solvency status of these entities. Market conduct regulation was initially deferred. As part of the reforms arising out of the crisis, the Insurance Act (1971) was repealed in 2001 and replaced by a new Insurance Act (and Regulations) which introduced standards for solvency, investments, accounting, corporate governance and elements of market conduct such as claims settlement. Within the new legislations, several new provisions aimed at maintaining the solvency of the insurers were introduced. Examples of these provisions are:
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The mandatory appointment of an actuary. This was to ensure that technical reserves were properly calculated and the treatment standardised.
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Stronger requirements relating to auditors and the introduction of an insurance accounting standard.
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Investment and loan regulations.
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The introduction of the new solvency standards, the Minimum Asset Test (“MAT”) for general insurance companies and the Minimum Continuing Capital and Surplus Requirement (“MCCSR”).
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Unlike the old Act, there are now penalties for breaches of the Insurance Act and Regulations outside of cancellation of registration
.
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An examination of each company quarterly and annually to determine whether the company is complying with the provisions of the
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Insurance Act and to determine whether the company is in sound financial condition using the CARAMELS
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framework. The new Act also required that all persons who manage or control an insurance entity should be fit and proper. The FSC interprets this to mean that all members of the senior management team, all directors and shareholders owning 10% and higher of a company’s share capital must satisfy the fit and proper test.
FSC’s Mandate
The legislation
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under which the FSC was established made it clear that the FSC’s mandate was to protect the interest of policyholders. The Insurance Act also stipulates that the directors and officers of an insurance company must act in the interest of policyholders. Is there then a conflict between the owners of capital and the policyholders? There need not be, as the regulator’s task of protecting the policyholders results in the direct protection of the company through various prudential and market conduct standards. The company is required to demonstrate and provide evidence to the regulator that proper and acceptable risk management systems are in place to protect the company. A company with these features should provide comfort to shareholders and policyholders alike.
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Under the CARAMELS assessment framework, a company’s risk profile is assessed according to the following areas of exposure: Capital, Asset Quality, Reinsurance, Actuarial, Management, Earnings, Liquidity, and Subsidiaries.
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The Financial Services Commission Act, 2001

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